Treasuries Likely To Benefit From Japan Pension Fund Reform

By Michael Aneiro

The Wall Street Journal kicks off its Money & Investing section today with a story about how Japan’s Government Pension Investment Fund is expected to announce reforms allowing it to funnel more of its $1.26 trillion in assets under management into foreign stocks and bonds. Because of the fund’s immense size, any increased allocation into Treasuries could be significant enough to boost aggregate demand and continue to prevent Treasury yields from rising. Eleanor Warnock reports for the Journal:

Yasuhiro Yonezawa, head of the Government Pension Investment Fund’s investment committee… outlined a tentative plan for a portfolio shift that would raise the allotments of the fund’s assets to go into domestic stocks, foreign bonds and foreign stocks by five percentage points in each category. The aim is twofold: to boost returns to ensure Japanese retirees get the payouts they expect, and to stimulate risk-taking at home by funneling money into growing Japanese businesses….

Currently, domestic stocks and foreign stocks are each targeted to get about 12% of the fund’s investment. Under the baseline scenario outlined by Mr. Yonezawa, those figures would rise to 17% each, while the portion allotted to foreign bonds would rise to 16% from 11%. Domestic bonds would fall to 40% from 60%, and the portfolio would likely include a new category for alternative investments in areas such as infrastructure, he said.

Late last week I spoke with Scott Minerd, chief investment officer at Guggenheim Partners, who I quote in my latest Current Yield column in this week’s Barron’s magazine, and he cited exactly this effect as one of the key reasons he sees Treasury yields falling from here rather than rising. Here’s what Minerd had to say:

“Today, my concern really centers around a common international theme: the increasing capital flows coming toward the United States. When we look at what’s going on with the ECB, the likelihood of negative deposit rates and the possibility of another LTRO, it’s all going to be very favorable for European bonds, and the exchange value of the euro will probably be capped at its current level, which makes U.S. investments much more attractive. On the other side of the world, we’re on the verge of a massive reform to the Japanese pension system that would allow more of its investments to be made around the world.

“The U.S. economy is clearly accelerating, and we should see rates rising, but instead we see large capital inflows toward the U.S. that should cap rates and could push rates meaningfully lower. It’s a conundrum because rates should be rising just based on the U.S. economy.”

Rates are falling again so far Wednesday after backing up for most of the previous week. The 10-year note is currently up 5/32 in price, trimming its yield to 2.617%, per Tradeweb data, while the 30-year bond is up 11/32 to yield 3.447%.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.